The Sydney Morning Herald had an interesting story this morning about a federal government scheme which is designed to take over from insurance companies in the event of a terrorist incident.

Sydney retailers whose earnings were slashed by up to 70 per cent during the Martin Place siege face smaller insurance payouts if the siege is deemed a terrorism event, because a government body will step in to curb insurers’ losses.
[..]
Under legislation passed following the September 11 attacks in America, the federal Treasurer can declare certain events to be acts of terrorism for insurance purposes.

In those circumstances a federally funded body, the Australian Reinsurance Pool Corporation, can step in to assess the likely loss from the incident and, where necessary, reduce the scope of claim liability for insurers. The aim of the arrangement is to shield insurers from catastrophic losses and thus ensure they continue to offer the products.

The article goes on to quote a spokesperson from IAG who says the federal government’s decision, regardless of the decision, is unlikely to affect how IAG pays out claims for loss of trade, but completely ignores something which came up on 2GB this morning…the federal government scheme is designed to insure for loss of buildings and does not cover loss of trade, but is set up in such a way that it can effectively nullify any need for insurers to pay out any claims if the incident is declared to be an act of terrorism. This is currently delaying the processing of claims with some insurers as they wait to see if they will need to pay anything, and has the potential to leave some businesses seriously out of pocket despite paying for insurance for exactly this type of event.

It’s just another example of how governments interfering with private business arrangements often leads to all sorts of unintended consequences, partially because governments rarely understand the private sector well enough to write rules which work, partially because governments take time to process things which cause debilitating delays to the private sector which doesn’t have the benefit of ongoing funding from taxpayers, and also because such rules are so often filled with easily exploited loopholes which bureaucrats often can’t anticipate because they’re not familiar with life outside the public sector.

I wrote an email to 2GB’s Luke Grant (who is currently filling in for Ray Hadley and Chris Smith across the middle of the day) about this shortly after he conducted an interview (from memory I think it was with Russell Zimmerman from the Australian Retailers Association, Update: It was, and audio of the interview is on 2GB’s websiteEnd Update) on the topic.

Good morning Luke,

This terrorism insurance debacle is a perfect example of the unintended consequences which occur when a well-intentioned government interferes with private business dealings.

It’s amazing that with so many bureaucrats writing the rules, government terrorism insurance for building loss can somehow nullify private “loss of trade” insurance, and nobody in government sees the problem. Unfortunately it’s all too common that bureaucrats who live in government land rather than the real world cause such a mess, and of course the private insurers don’t oppose the measures when the government makes them because they can see just how much money they’ll save.

It’s a mess which would never occur if governments kept their noses out rather than interfering with every little thing.

Regards,
Samuel Gordon-Stewart
Canberra, Australia

In this case the good intention of the government was to ensure insurance companies don’t go under while trying to pay out terrorism-related claims. Unfortunately, as is usually the case with such bailout type programs, it ignores the simple economic fact that if a product can’t be offered viably at a price which people will pay, it probably shouldn’t exist, and certainly shouldn’t rely on some magical fallback position of a government bailout from finite taxpayer funds. Sadly it seems that far too many people and industries see the government as a magic pot of infinite money and forget that government money only exists because it is legally confiscated from people via taxation, and thus should be treated with more respect and not expected to be a magical fix for every ill.